How does shorting on a foreclosure work?

The term “shorting” refers to purchasing or selling a property at short sale.  When the value of the property is less than the amount owed on it by the debtor, a bank and the debtor may agree to avoid foreclosure proceedings by allowing the debtor to sell the property for less than is owed on it.  Although the bank doesn’t get full value, it does save the legal fees and other expenses associated with foreclosure, which can be significant.  The debtor often gets a somewhat cleaner credit record.  Depending on the short sale agreement between the debtor and the bank, a short sale may or may not eradicate the debtor’s obligation to pay any deficiency – the amount by which the sale price falls short of the amount owed on the  mortgage.  A short sale is often a good way for a buyer to purchase property for less than he would pay if he bought it through normal channels and mortgaged the purchase price.